China's Way of Thinking-Published February 2012

          It is common knowledge China is purchasing natural resources at an alarming rate. The most popular theory as to why is simple; a growing population, coupled with mass migration to cities as people demand a Western style of living. This is true. However, there is a high probability that the Chinese government is also planning long term, by this we mean 50 years down the road.

          Going over recent facts, it is becoming clear China is planning for the very long distant future. This bodes well for the Chinese economy for decades to come. However, everyone is missing one important fact about China; in many instances, the country is self-sufficient in most goods. Yet, it continues to buy resources from other countries when it is not necessary.  The most obvious reason is to stock-pile. 

          It has become apparent the Chinese government has decided to use other countries resources and leave most of theirs available for domestic use in the future. Coal is a perfect example, the country has over 200 years worth but they remain the biggest buyers of Australian coal. Plus, they buy from Canada, Brazil, and to a lesser extent, from America. In 50 years time Canadian, Australian, and Brazilian coal will be very expensive to mine. Meanwhile, China will still have plenty of cheap coal left in the ground.

          As mentioned in earlier issues, they have bought and are managing thousands of acres of rich farmland in Botswana. When my Father visited Botswana 5 years ago, he saw no Asians working the land. Wisely, the Chinese do not advertise what they are up to and employ only locals. This is a cheap form of insurance for years when Mother Nature is not kind to the Chinese farmer. For Botswana, this equates to investment, tax revenue, and more importantly, jobs.

          China is now buying up Australian farmland. It would not be surprising to find out they have bought land in Canada, the U.S., and France for their wheat. If they have made such purchases, they, along with the local politicians that govern the land, will attempt to keep it quiet as long as possible. Other nations buying large tracts of land could create a political nightmare amongst the people for both nations involved.

          China has signed long term contracts for Australian natural gas. Given the collapse in the price, we suspect they will demand, and most likely receive, a cut in the price they agreed to. Natural Gas is in a free fall and is likely heading to $1.50. If it came to crunch time, China will simply walk away from any contract they do not like. Similar to coal, China would rather buy cheap offshore natural gas and save their own for a future date. It is estimated that China has up to 200 years worth of gas stuck in shale rock.

          The Chinese have been forced to think long term. For the first time ever, urban population is at 51% of the total population. In order to control the growth and limit unemployment, they forced 20m people back to the countryside twice last decade. However, this did not slow the influx.

          Australians are basing their future solely on China being a major buyer of all their goods. Sadly, you can not trust the Chinese. They honor only contracts that suit their interests and do not care about the West. For Canada, Norway and a handful of others, no matter what, China will always demand our forest products. They simply cannot grow enough trees to meet their growing population.

          We are the only ones who think China is preparing for their own future.  When they decide, if ever, to go at it alone, as they did for over 50 years last century, many countries and businesses in the West will be hit very hard. They could easily drive some countries like Australia into recession. This, we believe, is why many large companies have been hesitant to invest directly in the country. If this was not the case, more large Western corporations would be investing directly in China.

          The one thing they have done, and will pay dearly for, was to redirect rivers that were flowing into the Yangtze River to help build the Three Gorges Dam. Some water soaked areas, especially within 100 miles of Beijing, have now turned into rock hard soil and is now unusable. It will take decades to clean up this mess, if ever. Water will be the biggest source of trouble for China. Without it, there is no future. China has time on its side, but as we all know, time goes by too fast. We have to assume China is currently working on this problem.

          China will be an ongoing story for years to come. It will unravel completely different from today’s thinking. They are planning long-term, something the West does not understand or do.